Identify the type of cost accounting system

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Reference no: EM1311352

Identify the type of cost accounting system.

Armstrong Helmet Company manufactures a unique model of bicycle helmet.  The company began operations December 1, 2006.  Its accountant quit the second week of operations, and the company is searching for a replacement.  The company has decided to test the knowledge and ability of all candidates interviewing for the position.  Each candidate will be provided with the information below and then asked to prepare a series of reports, schedules, budgets, and recommendations based on that information.  The information provided to each candidate is:

Cost items and account balances

 

Administrative salaries

$15,500

Advertising for helmets

11,000

Cash, December 1

0

Depreciation on factory building

1,500

Depreciation on office equipment

800

Insurance on factory building

1,500

Miscellaneous expense - factory

1,000

Office supplies expense

300

Professional fees

500

Property taxes on factory building

400

Raw materials used

70,000

Rent on production equipment

6,000

Research and development

10,000

Sales commissions

40,000

Utility costs - factory

900

Wages - factory

0

Work in progress, December 1

0

Work in progress, December 31

0

Raw materials inventory, December 31

0

Raw materials purchases

70,000

Finished goods inventory, December 1

0

 

Production and sales data

 

Number of helmets produced

10,000

Expected sales in units for December ($40 unit sales price)

8,000

Expected sales in units for January

10,000

Desired ending inventory

20% of next month's sales

Direct materials per finished unit

1 kilogram

Direct materials cost

$7 per kilogram

Direct labor hours per unit

0.35

Direct labor hourly rate

$20

Cash flow data

Cash collections from customers: 75% in month of sale & 25% the following month.

Cash payments to suppliers: 75% in month of purchase & 25% the following month.

Income tax rate: 45%.

Cost of proposed production equipment: $720,000.

Manufacturing overhead and selling & admin costs are paid as incurred.

Desired ending cash balance: $30,000.

Using the data presented above, do the following:

1. Classify the costs as either product costs or period costs using a five-column table as show below. Enter the dollar amount of each cost in the appropriate column & total each classification.

Product Costs                                                   

 

 

 

 

Item

Direct Materials

Direct Labor

Manufacturing Overhead

Period Costs

 2. Classify the costs as either variable or fixed costs.  Assume there are no mixed costs.  Enter the dollar amount of each cost in the appropriate column and total each classification.  Use the format shown below.  Assume that Utility costs - factory are a fixed cost.      

Item   

Variable Costs

Fixed Costs

            Total Costs

3. Prepare a schedule of cost of goods manufactured for the month of December 2006.

4. Determine the cost of producing a helmet.

5. Identify the type of cost accounting system that Armstrong Helmet Company is probably using at this time. Explain.

6. Under what circumstances might Armstrong use a different cost accounting system?

7. Compute the unit variable cost for a helmet.

8. Compute the unit contribution margin and the contribution margin ratio.

9. Calculate the break-even point in units and in sales dollars.

10. Prepare a flexible budget for manufacturing costs for activity levels between 8,000 and 10,000 units, in 1,000 unit increments.

11. Identify one potential cause of materials, direct labor, and manufacturing overhead variances in the production of the helmet.

Calculate the per unit cost amounts before you prepare the 3 flexible budgets.  This is asking for a flexible budget for a very specific item.

Check figures:
a. Total Period Costs = $78,100
b. Total Manufacturing Overhead = $11,300
c. Total Variable Costs = $181,000
d. Total Costs = $229,400
e. Miscellaneous expenses - factory are considered to be variable.

Reference no: EM1311352

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